Simple Trading Strategy – Tutorial & Guide

In this article I show you a simple trading strategy for index trading with CFDs. You can test it first by using demo accounts.

The development of your own trading strategy is of fundamental importance. You have to make sure that a trading strategy fits you and your characteristics.

Just because another trader successfully trades a certain setup, does not mean that you can.
This article is mainly aimed at advanced traders who know how to draw supports and resistances in the chart and understand their meaning.
If you are just starting out, you should familiarize yourself with the above “lines” first.

I had already published the article “How to apply Fibonacci Retracements profitably” a few weeks ago.

Today I would like to describe the approach in more detail and give you a feeling for the “right” way to use it.

As you know, I mainly focus on Forex and index trading (especially DAX, Dow, S&P500. FTSE100, CAC and Eurostoxx). Forex trading works according to different criteria than index trading.

While forex trading is dominated by fundamentals and news (which unfortunately most private traders do not understand), index trading is certainly influenced by chart technique.

I trade these markets with CFDs, for highly capitalized accounts I recommend futures. The advantage of CFDs or futures is obvious.

I have a transparent product and favourable financing costs (with suitable brokers), as long as I hold the positions overnight – rather unusual with this setup.

I have no problem with the “Greeks”, i.e. implicit vola, delta, gamma, etc., as with warrants and therefore a very transparent derivative.

Step-by-step to the trading strategy

Let us now discuss the trading strategy in detail:

  1. determine chart setting

I choose the 10 or 15 minute chart setting in the indices I have chosen, so that one candle represents a period of 10 or 15 minutes. For the rest of the time we stay with the DAX.

I now wait for an acceptable range, which should be at least 100 points between the daily high and the daily low in the DAX intraday. This means that there is rarely a trade before 09:30.

I therefore consider healthy volatility with a clear trend direction (intraday) important. If this clear direction is not available, this strategy does not fit and it is up to me whether I get carried away to senseless trades or whether I have the discipline to stubbornly and consistently wait for a good opportunity.

  1. enter resistance and support

Based on the last few days (preferably also from the 1-hour chart), I see significant support and resistance.

  1. create Fibonacci retracements.

Fibos are used to determine support and resistance levels after significant upward or downward movements. Retracements and Extensions measure the percentage of an opposite price swing in relation to the range of the previous price swing.

We use Fibonacci retracements, just like resistances and supports, to determine a reversal in the chart.

Important to know: The correction is always the last movement. Furthermore, we only focus on the 38 and 61 levels. Throw all other levels out of the setting (as pure coincidence).

4.search for common levels

Place trades where supports (if long trade planned) / resistances (if short trade planned) are combined with a Fibonacci level.

In the lower chart this is the case on the 38 Fibo. The black dots only mark the support line (purple).

When the trade is going on there are now three scenarios for me to deal with.

a) The price does not respect the fibos and supports and thus continues its correction. There is no rebound and my trade goes into the red. Depending on the risk management, an SL must be placed to prevent a further slide.

For my Dax trades I give the price about 10-15 points margin before the SL takes effect. Do not only pay attention to this point target but also plan your stop setting based on the previously trained price patterns or your intuition.

b) The rebound happens at my – or near my trade opening and my trade runs a few points into the plus. After that it turns back into the correction that started before (i.e. against my trade direction).

c) The rebound occurs and the price resumes the long movement, not just for a few points. This scenario is the ideal case.

So with my setup I want to make profit in cases b) and c), in case a) I have no chance.

A short note:

In this picture, the fibos are not “correctly” set up, because in this case the 0 belongs to the top and the 100 to the end. But since I only concentrate on the 38.2 and 61.8, it doesn’t matter (100-38.2 = 61.8).

There are other points to consider:

After 15:30 mainly the US-Americans determine the trade on the world markets and a positive intraday correlation to DowJones, SP500 and Nasdaq has to be considered. So, if DAX has reached a fibole level, but the Americans want to continue the correction, then the DAX can hardly escape this scenario.
Lateral phases and narrow trend channels without healthy volatility are not the best conditions for this strategy.
Resistances may appear on the higher level chart (1h/4h), which are not visible on the 10 min chart – so pay regular attention to the “general weather conditions”,
Choosing the trading direction of the overall trend further improves the risk/reward ratio.
The nice thing about Fibos is that they are a very reliable tool for possible turning points in any time unit. Combined with the support and resistance zones, they may not be a 100% instrument, but the chances of a positive profit-loss ratio are very good.

It must be said that I am not a fan of stubborn rules, such as Always keep the same stop-loss distance or, on the other hand, always set the take-profit equally. In the long run, the one who allows a certain inaccuracy in the otherwise fixed setup will have the most success.

This inaccuracy is called experience or intuition and becomes more and more pronounced with increasing time spent in trading and often determines the successful outcome of a trade.

How do I place a trading strategy correctly?

Private traders need to understand that a trading strategy alone does not ensure constant profits. I have often seen a trader come up with an idea for a trading setup and the idea proved to be successful during backtesting.

However, in backtesting, data quality plays an important role and wrong assumptions are made very quickly. Even if the backtesting was carried out properly and the result looks attractive over a relevant period of time, I unfortunately still haven’t reached my goal.

I claim that 50% of all traders can very quickly work out and develop a (theoretically) working trading strategy. But only 5-10% are able to stick strictly to the self-imposed setup and thus achieve really constant profits.

Often it is emotions such as greed, impatience or even jealousy of another trader that lead us to make mistakes.

We increase the position size, we don’t wait until the setup really(!) shows up clearly, we move our stops backwards again and again. All these errors then lead to the fact that our account balance does not grow, but melts.

To successfully implement a simple trading strategy, traders need a strong mental constitution and a clean preparation. The strategy can be very simple and yet successful, according to the KISS formula (Keep it simple, stupid).

With a trading plan, traders should document every single trade and perform regular analysis. If you don’t have an idea for a trading plan yet, you can download our free sample here.

With the help of the Trading Plan you can document your strategy as well as the thoughts and the result of the individual trades. It is an aid for more discipline in trading.

So you can see that as a trader you have to work hard to achieve sustainable success. Of course, there are always periods when the strategy produces 5-10 failed trades in a row, but if your analysis, backtesting and experience (e.g. on demo accounts) showed you mostly positive results, then you don’t need to worry about a few failed trades.

Conclusion:

The nice thing about Fibos is that they are a very reliable tool for possible turning points in any time unit. Combined with the support and resistance zones, they may not be a 100% instrument, but the chances of a positive profit-loss ratio are very good.

It must be said that I am not a fan of stubborn rules, such as Always keep the same stop-loss distance or, on the other hand, always set the take-profit equally. In the long run, the one who allows a certain inaccuracy in the otherwise fixed setup will have the most success.

This inaccuracy is called experience or intuition and becomes more and more pronounced with increasing time spent in trading and often determines the successful outcome of a trade.

This trading strategy, as described above, is mainly aimed at advanced traders who have a good basic trading knowledge but are still looking for a setup. I hope to have given one or the other a food for thought, which he can now develop for himself personally.

It is also important that you treat such a trading strategy as one of many strategies. If you would only use this strategy, you would have no possibility to trade in markets with low volatility.

This in turn would lead to “sense lostrades”!

It is therefore helpful to construct a portfolio of individual strategies. You should make sure that these trading strategies fit you and your character traits!

Just because someone trades a strategy successfully, it doesn’t mean that you have mastered this setup.

After all, the “human factor” plays the decisive role in trading.

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